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Global Markets to 28 January 2019


Highlights

  • Wall Street rises for the fifth week in a row as investors continue to buy US equities in the wake of the markets’ biggest recorded drop in December.
  • President Trump backs down on the longest US government shut-down in history – although this may only be a temporary capitulation.
  • A further boost to the markets comes from a suggestion that the US Federal Reserve Bank’s balance sheet might be discussed in more detail at this week’s central bank policy meeting.
  • In the UK, sterling rises to its highest level against the US dollar since November as the Prime Minister refuses to rule out an extension to Article 50 (which would delay Brexit).
  • In Europe, ECB President Mario Draghi acknowledges downside risks in growth, fuelling talk of a possible shift in the Eurozone’s policy guidance.
  • It’s another good week for global equity markets as investors continue to add or increase their exposure to risk assets.


Global Market Summary

It’s now been a month since Christmas and the turmoil created by those horrific falls in the markets throughout December. Thankfully, so far this year a number of global stock markets have managed to recover the ground they lost and many seasoned global investors have begun to take advantage of oversold markets and individual stock positions.

Many of those unloved markets of 2018 have now become the early favoured markets of 2019. Now that it looks as though some solutions might be found to those global issues that affected risk assets last year, investors have started buying back into some of those oversold markets and individual stocks created by the December devastation.

Admittedly, one major issue – trade tensions between the US, China and now Europe – has yet to be resolved. But talks are continuing, and that in itself has helped to lift market sentiment. However, it was talk of the US Federal Reserve Bank ending its quantitative tightening programme sooner rather than later that led to Wall Street recording its fifth rise in a row.

Regarding some of those favoured sectors and stocks on Wall Street, the likes of Apple, Amazon, Alphabet and Facebook benefited from the recovery. The market seems to have recovered some of its euphoria, with many hoping that December did indeed represent the bottom of the market.

Another issue of contention has been the longest US government shutdown in history. Although President Trump has struck a deal to temporarily reopen the government for three weeks in the hope of finding a longer-term solution to the issue of immigration, he has threatened to let funding lapse again in mid-February or declare a national emergency if lawmakers do not reach an agreement. We, therefore, need to remain vigilant and hope that the markets’ recent enthusiasm is not short-lived; they may yet falter if some of these important issues are not addressed.

In the UK, meanwhile, the Brexit debate staggers on. Prime Minister Theresa May has refused to rule out extending Article 50, while Europhile MPs have proposed a bill which could delay Brexit by up to nine months if it proves impossible to agree a deal before the March 2019 deadline.

Amber Rudd, the government’s Secretary of State for work and pensions, has warned Mrs May that further ministerial resignations might ensue if they are not allowed to support an extension to Article 50 – adding even more fuel to an already-raging Brexit fire.

Unless the Prime Minister is able to secure parliamentary backing for her deal over the next month, then there is every chance that the Brexit can be kicked further down the road, and the UK’s exit from the European Union delayed. This now looks particularly likely given the momentum building behind a cross-party amendment to force Theresa May to request a delay.

Last week’s rise in the value of sterling against the US dollar does seem to indicate that FX traders are reaching the same conclusion, although the FTSE UK Mid-Cap Index is up by 7% this year, suggesting that these stocks will do better against a backdrop of a rising pound. Extending the Brexit deadline deal, however, does not actually solve the problem: it simply delays the outcome and the point at which a decision has to be made.

In Europe, the European Central Bank will not increase its holdings of government bonds this month. However, the softness of recent Eurozone economic data released has prompted ECB President Mario Draghi to recognise that there are now downside risks to growth in the region. This could alter the Bank’s policy guidance, given that risk factors such as trade tensions, Brexit and China’s economic slowdown will all negatively impact the European economy if they are not addressed.

The Bank of Japan has also cut its inflation target forecast, briefly sending the yen plummeting to a three-week low against the US dollar. This could have further ramifications and the Bank of Japan is currently pondering its next move, which could involve easing rates further.

Investors have clearly had something of a roller-coaster ride in the global equities markets over the last few months. The same can be said of the currency markets, with sterling being the most unpredictable currency traded, buffeted – as it has been – by Brexit-related uncertainties. But despite the agonisingly slow progress recently made by the UK Parliament and EU, the pound has actually gained ground on the US dollar.

Needless to say, this could just be a transient appreciation, and this possibility seems to be reflected in the wide dispersal of forecasts currently being issued by the leading FX traders. For example, some believe that the pound will trade narrowly, holding steady at around US$1.30. Others are predicting rates of between US$1.37 and US$1.42 to the pound by the end of 2019.

As far as commodities are concerned, the price of gold bullion has recently hit a seven-month high – US$1300 per troy ounce. Current thinking is that if the markets begin to retrace their recent gains, then investors will seek those safe-haven assets of gold, Japanese yen and US Treasuries.

Palladium, however, has increased in value by more than 50% since its August lows, hitting a record high this month. This surge in value can apparently be attributed to rises in crime rates. Thieves have been stealing catalytic converters from road vehicles and then selling them on to illegal scrap dealers in exchange for cash.

Finally, the recent euphoria on the global equity markets is likely to continue over the coming weeks. Global investors will readjust their asset allocations within their portfolios, factoring in the probability that the world’s leading central banks are likely to remain relatively dovish in relation to any further quantitative tightening. They will also take the uncertain outcomes regarding Brexit and trade tensions between the world’s two largest economies into account.

As far as our strategy is concerned, we are always on the lookout for opportunities to buy quality at cheaper levels, and the December debacle has created appropriate circumstances for adding to some positions while considering new openings that embrace the ever-changing world that we live in. However, market sentiment remains volatile and anxiety levels continue to be elevated: some level of caution is still advisable.


Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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